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News | Keeping greenbacks in Vermont

MONTPELIER — When you think of pension funds, and the people who manage them, the term activist is not usually the first, or even second, word that comes to mind.

Vermont Treasurer Jeb Spaulding, however, in recent months has been turning the office into a change agent of sorts, leveraging the $3 billion in pension investments to stop companies from investing in Sudan, encourage companies to adopt policies that reduce greenhouse gas emissions, as well as diverting some money to be invested in Vermont projects rather than top flight companies headquartered elsewhere.

This week, Spaulding announced that a new pension fund program is in the works designed to support economic and community development in Vermont, and he is soliciting proposals that he hopes will generate investments in the areas of affordable housing, energy efficiency, venture capital, and timber management.

Spaulding said the pension funds will not make direct investments into a project, rather those decisions will be made by a fund manager.

There is also no minimum, or maximum, amount that the pension funds will see invested in each project. The state’s pension funds hold about $3 billion in assets, so Spaulding said even diverting 1 percent — or $30 million — would have a positive impact in Vermont.

“What we’re really hoping is that if we lay out our criteria and don’t limit the field of what kind of asset classes we can invest in that the creative minds in Vermont will come up with proposals that we can consider,” said Spaulding.

While Vermont’s model is based on what is done in Massachusetts, New York, and in other states, Spaulding said he expects that some proposals might set in motion new ideas that can be funded by economically targeted investment programs in other parts of the country.

“What might be different here is that there is enough innovation out there that we might see investment proposals that they haven’t seen in other states and might get others around the country,” said Spaulding.

In particular, Spaulding said he believes with all the talk about climate change and energy efficiency that someone might be able to come up with a proposal aimed at helping to make homes more energy efficient.

A program under consideration in the Legislature has faltered recently because lawmakers are hesitant to enact a surcharge, or tax, on heating fuels.

The state Department of Public Service has estimated that Vermonters could save more than $450 million if they invested $150 million over the next 10 years.

Spaulding decided to get the funds to adopt a set of policies and procedures — which they did last fall — after digesting a report on economically targeted investments (ETIs) conducted by Burlington policy analyst Doug Hoffer.

The report, issued in February 2004, outlined what guidelines other states have put in place, and what success stories, as well as cautionary tales, were to be had at the time.

“The report makes it abundantly clear that you have to have a double bottom line — you cannot simply have a higher risk and double return, rather you need to be able to provide the competitive market rate return and have the collateral benefits of investing that money in local projects,” said Spaulding.

According to some estimates Hoffer’s report found, state and local pension plans control about $2.2 trillion in assets. And, at least 29 states have a public pension plan with some form of an ETI program. The combined assets invested in ETI programs are estimated to be 2.4 percent of the total — about $55 billion. The most common ETI programs are residential housing and venture capital. Eighty-four percent of all ETI funds are invested in residential housing and other real estate.

Other states have made investments in venture capital funds, but Spaulding said he didn’t believe that would be a solid option for Vermont to pursue because the state’s returns from venture capital investments has been less than stellar.

About 10 years ago, the pension funds diverted several million dollars into three different venture funds. In two, the funds have recouped their investment, while the third may post a modest gain, but below market.

The first request for proposals window will be May 1-June 15. In order to be considered, proposals must, at a minimum:

• Target risk-adjusted, market-rate returns equivalent to or higher than other available investments in a similar asset class, and,
• Provide a substantial, direct, and measurable benefit to economic or community development within the state of Vermont.

This isn’t the only current case of Vermont’s large cash holdings at work in Vermont.
Spaulding has also been diverting some of the state’s short-term investments and cash holdings — which can range from $20 to $300 million on any given day — into local Vermont banks.

His office hosts a monthly Internet bidding process, and is circulating about $40 million through a series of local banks. Spaulding said the state is seeing better interest rate returns through this process.

“We feel there are benefits to doing this because we believe the banks will recirculate the money in Vermont, and if we can do that and get a better return then that is a win-win for everybody,” said Spaulding.

Beyond keeping the green in Vermont, Spaulding is also a founding member of the Investor Network on Climate Change, which is a collaboration of institutional investors who work to engage the investment community on “what kind of new risks the carbon-constrained world presents to companies and investors.”

Vermont’s first foray into this investor-led proxy was sponsoring a shareholder resolution at a recent annual meeting of Bed Bath & Beyond. Spaulding said the resolution called on the company to be more climate neutral.

“We didn’t win that one,” said Spaulding.

However, 65 investment groups and Merrill Lynch did place a call to Congress urging members to enact clear regulatory frameworks so businesses know what kinds of rules and regulations they are going to have to adhere to in the future.

This, said Spaulding, will especially give investors an idea of what companies are living up to the standards, and which ones might not be.